Looping ETH With Liquid Staking Tokens: A Risk Framework

May 14
3 min read

Updated: May 16

Looping ETH with liquid staking tokens (LSTs) is often portrayed as a yield enhancement technique. But for allocators managing meaningful capital, recursive staking isn’t a yield opportunity—it's a structural decision. When unmanaged, it compounds risks across collateral, liquidity, and protocol layers.

AXM Capital approaches LST looping not as an opportunistic trade, but as a capital allocation problem with clearly governed parameters.

What Looping ETH Actually Means

At its core, looping is the process of using an LST, such as stETH or sfrxETH, as collateral to borrow ETH, which is then staked again to mint more LSTs. This process is repeated recursively to amplify staking exposure and yield.

The theoretical benefit: a higher blended return on ETH. The practical risk: exposure to liquidation, LST depeg, and execution inefficiency. Without structure, this quickly shifts from capital-efficient staking to over-leveraged speculation.

Risk Factors AXM Capital Engineers Against

Our execution framework is built to mitigate the structural vulnerabilities inherent in recursive ETH-LST strategies. We address key risk categories through embedded logic and on-chain enforcement:

Liquidation Risk

Each loop increases leverage. A minor drop in ETH price or a spike in borrow rates can push positions toward liquidation. AXM Capital enforces vault-level loan-to-value (LTV) limits, typically 65–70%, to ensure ample headroom.

Depeg Risk

LSTs can diverge from their intended peg to ETH, especially under liquidity stress. AXM Capital uses oracle variance thresholds and depth monitoring to reduce reliance on any single LST and to halt deployments if peg risk exceeds defined tolerance.

Volatility Risk

Market volatility affects both the collateral (LST) and the borrowed asset (ETH). Execution pacing logic is embedded to reduce allocation size or pause redeployment during elevated volatility windows.

Protocol Risk

Not all lending markets or staking derivatives are created equal. AXM Capital maintains an internal risk scoring system to determine eligible venues, minimising composability risk and platform fragility.

Slippage and Entry Degradation

Yield benefits vanish quickly if looped under poor liquidity conditions. Vaults include slippage tolerances to ensure execution remains within acceptable cost bounds.

How AXM Capital Structures the Loop

Each LST looping strategy is deployed through a dedicated smart contract vault. These vaults are non-custodial, isolated per client, and encoded with specific constraints aligned to the mandate.

Governance parameters include max LTV, execution pacing intervals, loop depth limits, and approved collateral markets. Circuit-breaker logic halts redeployment when any risk threshold is breached. This ensures capital isn’t just deployed—it’s governed.

Importantly, redeployments do not occur manually. They follow predefined cadence logic, allowing the strategy to adjust passively to market shifts without relying on human reaction time.

Stress Scenarios and Defensive Design

We model every looping structure against volatility and failure conditions before deployment. Examples include:

ETH Flash Crash: Position caps and buffer ratios prevent forced liquidation. The vault halts redeployment as volatility exceeds the risk band.
LST Depeg Event: If stETH or similar tokens trade below a defined discount, looping halts. Funds remain allocated but isolated.
Protocol Outages: In the event of protocol failure or liquidity drain, assets are rotated into secondary-approved platforms or held idle, depending on mandate preference.

Why This Matters for Capital Allocation

Looping ETH with LSTs can be a valuable mechanism for enhancing ETH-denominated yield. But the delta between capital efficiency and capital destruction is a matter of structure.

We don't loop for maximum APY. It loops within constraints, defined by vault logic, risk parameters, and strategy pacing. For allocators, this translates to a scalable, modular ETH allocation strategy with reduced drawdown sensitivity.

Where others chase short-term staking multipliers, we're engineered for long-term capital performance.